What is a power purchase agreement (PPA)?

PPA buyers commit to purchase renewable energy at a fixed MWh price for a defined term, often 10–25 years.

PPAs provide energy buyers with greater control over their energy consumption habits, significant energy cost savings and in certain circumstances, cost certainty. They can also grant the buyer the asset’s associated renewable energy certificates (RECs).

RECs represent the electricity that otherwise comes from generated by fossil fuels. Organizations use RECs to support their clean energy and sustainability goals and comply with carbon emissions regulations. In the European Union (EU), there are also similar energy attribute certificates called Guarantees of Origin (GOs).

For energy suppliers, PPAs provide long-term cash-flow certainty. They are considered key to the further development of renewable energy projects, such as solar and wind farms.

In a broader sense, in signaling a commitment to buy renewable electricity, PPAs directly lead to the development and construction of new clean energy projects that might not have otherwise been built. Known as net‑new renewable supply, this benefit hedges against climate impact and long-term market risk. It increases zero-carbon power generation on the grid, which supports net-zero emissions initiatives across industries.

Power purchase agreements (PPAs) are either onsite or offsite. Onsite PPAs locate renewable energy assets at the offtaker’s location, while offsite PPAs provide access to large-scale energy assets located elsewhere. Here are the major differences.

In an onsite power purchase agreement, the renewable energy assets, such as wind turbines or solar panels, are installed at the offtaker’s location.

The energy supplier (or project developer) handles the operations, ownership and maintenance of the renewable energy system for the agreed-upon term. There are no upfront or capital costs for the energy buyer.

For some energy buyers (large organizations), onsite renewable energy generation is not sufficient for meeting renewable energy goals.

Offsite PPAs allow them to meet these goals and even fulfill regulatory obligations by providing access to large-scale renewable energy installations from which they can procure larger volumes of renewable energy.

Power purchase agreements (PPAs) are either physical or financial.

Physical PPAs deliver electricity to the customer through the grid.

Financial PPAs—also called virtual power purchase agreements (VPPA), synthetic PPAs, contracts for differences or fixed-for-floating swaps—provide energy buyers with financial credits or offsets for the renewable energy generated. The energy supplier still sells the electricity to the grid.

The revenue from this sale (based on the agreed-upon “strike price” per kilowatt-hour) is returned to the energy buyer. If the sale of electricity is below the agreed-upon strike price, the customer owes the seller the difference. Financial PPAs are function as a hedging arrangement, as they reduce the risk of electricity price volatility for both parties.

Financial PPAs are useful for organizations in traditionally regulated energy markets that do not allow physical PPAs. Financial PPAs allow such organizations to take advantage of tax credits and incentives and meet sustainability goals. They also provide the energy sellers with funding for project development.

The following elements lay out some of the core differences between physical and financial PPAs:

There are several power purchase agreement (PPA) pricing models on the market, including fixed-price, index-based, hybrid-price and price-escalators.

A fixed-price or fixed-rate PPA gives buyers a set price for electricity purchases. These PPAs offer price stability against electricity market fluctuations.

For organizations, this stability can translate to greater operational predictability. Fixed-price PPAs are among the most common PPAs on the market.

Also called variable or floating PPAs, index-based PPAs are priced based on current market rates for electricity. Similar to fixed-price PPAs, they are also common.

These types of PPAs offer greater flexibility than fixed-price PPAs but also introduce the risk of market volatility. However, variable PPAs still deliver electricity at a discount-to-market price.

Less common than fixed-price and index-based PPAs, hybrid-price PPAs mix and match electricity pricing models. Some power is delivered at a set price. Other power is delivered at a variable price.

This agreement is more complex but can help energy buyers reap the benefits of both energy price predictability and flexibility.

PPA price models can also include annual escalators or price escalation rates. In these instances, electricity is sold to the buyer at a price that increases at certain intervals during the contract at an agreed-upon rate.

Sleeved PPAs use a utility or energy supplier as an intermediary to “sleeve” renewable power from a generator through the grid to a corporate buyer. This structure bundles physical delivery and billing into the buyer’s standard supply arrangement.

They simplify renewable procurement and hedge market risks for the buyer by having the utility manage grid balancing, wholesale market exposure and contractual complexity in exchange for a sleeving fee.

Green‑tariff PPAs give energy buyers an alternative to traditional PPAs and utility companies offer them directly.

Through a green tariff PPA, a utility buys electricity from renewable energy generators and power plants on behalf of an energy buyer. The buyer receives both the energy and associated RECs. This program is a voluntary utility offering that can help energy customers advance and fund renewable energy development and meet their sustainability goals without directly managing a PPA.

The combination of stakeholder pressure, rising awareness of environmental issues linked to climate change and the financial benefits of renewable energy has increased the appeal of PPAs. As a result, corporate buyers across sectors are adopting them.

Top purchasers include multinational organizations in technology, retail and manufacturing. Tech companies, in particular, use corporate PPAs to meet the electricity demand of their data centers. In 2023, Amazon, the top renewable energy buyer of that year, announced 74 PPAs across 16 markets totaling 8.8 gigawatts.

Nonprofit organizations also buy PPAs. Because these organizations cannot take advantage of federal tax credits to support the purchase of onsite renewable energy systems, PPAs are a viable green energy procurement option.

Individual homeowners can also enter into PPAs. For example, solar power purchase agreements (SPPA) allow individuals to host solar projects, such as a photovoltaic (PV) system with solar panels, on their property with no upfront costs. Similar to traditional PPAs, solar PPAs allow the developer to own and operate the energy system from which the host customer can purchase the electricity.

Blockchain technology has made it possible to split large PPA contracts into smaller units, both in units of energy and length of time. This development has created a secondary market for PPAs with lower barriers to entry for smaller companies and individual buyers.

Currently, the Americas—which include the US, Canada and Latin America—constitute the largest region for PPA activity. This region is followed by the European, Middle Eastern and African (EMEA) region. Comparatively, PPA activity is lower in the Asia Pacific (APAC) region but has seen record highs with recent policies supporting growth.

PPAs offer energy cost savings, energy cost stability and the ability to support the advancement of the renewable energy transition. However, there are some challenges associated with PPAs.